[2010] UKFTT 571 (TC)

TC00822

Appeal number:  TC/2010/02310

Income Tax-Employed and self employed income –Claim for deduction of expenses –claim not proportionate or reasonable –lack of documentary evidence –onus of proof not discharged by Appellant –deductions which were allowed proportionate in the circumstances- Appeal dismissed.

FIRST-TIER TRIBUNAL
TAX CHAMBER

	D O NEEDHAM	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Income Tax)	Respondents

				TRIBUNAL: 	 DR K KHAN (Judge)
						 DR C SMALL

Sitting in public in London on 15 October 2010

Mr Lovemore Sisimaye, Accountant of L Wilson & Co, for the Appellant 

Mrs C Payne-Dwyer, Higher Officer, Appeals and Reviews Unit, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.	This is an appeal against Revenue Amendments made under section 28A(1) and (2) Taxes Management Act 1970 (“TMA”) for the tax years ended 5 April 2002, 2003, 2004, 2005 and 2006.  The appeal is dated 10 April 2008 with the amendments issued on 18 March 2008.

2.	The Revenue Amendments were made to disallow some of the business expenditure claimed by the Appellant as a deduction against self-employment.

3.	The issue is whether the Appellant is overcharged by the level of the amendment contained in the Closure Notices for the year ending 2002, 2003, 2004, 2005, 2006.

Background

4.	The Appellant   first worked in the construction industry  employed through an agency, O’Neill & Brenan Construction Ltd until April 2004.  Thereafter, he was employed by Wates Group Ltd.  He paid tax under the PAYE regulations. He also did some private work for friends and family.

5.	In November 2006 the Appellant submitted five unsolicited tax returns for the year ended 2002-2006.  These were made by the Appellant’s agent Mr L Sisimaye of  L Wilson & Co, Accountant.

6.	In his tax return submitted, the Appellant declared income from self-employment and claimed deductions, which resulted in each of the relevant years showing a loss.  The amount of income and deductions included on the returns is shown on the attached table:

  Tax Year	       A
   Figures
 Declared
       £	        B
   Figures
Assessed
       £	       C
Figures per
   Review 
        £      	
  Amount
 refunded
       £	       C
Revised due
    
        £	Total
at Stake
  
      £	
2005-2006							
Employment
income	  38,648						
S/E Income	    1,006	     1006	    1006	1,714.70	   (257.60)	1,457.10	
       Less							
Expenses	    4,595    	       250	    1304				
Cap Allces	    3,109		      352				
Profit/(loss)	  (6,698)	      756	    (650)				
2004-2005							
Employment
income	  28,254						
S/E Income	    1,500	    1,500	    1,500	2,433.50	(1,034.96)	1,394.54	
        Less							
Expenses	    4,556	       250	    1,139				
Cap. Allces.	    3,758		       346				
Profit/(loss)	   (6,814)	    1,250	     (457)				
2003-2004							
Employment
Income	  23,814						
S/E Income	    1,105	    1,105	    1,105	1,527,98	     (63.66)	1,464.32	
       Less							
Expenses	    3,494	       250	       874				
Cap. Allces	    4,559		       523				
Profit/(loss)	   (6,948)	       855	      (292)				
2002-2003							
Employment
Income	  17,649						
S/E Income	       864	       864	       864	1,512.96	     (92.64)	1,420.32	
       Less							
Expenses	    3,096	       250	       774				
Cap.Allces	   4,650		       516				
Profit/(loss)	  (6,882)	      614	      (426)				
2001-2002							
Employment
Income	 11,571						
S/E Income	      692     	      692	       692	1,032.02	   (112.20)	   919.82	
       Less							
Expenses	   4,341	     250	     1,085				
Cap. Allces	   1,048     		        123				
Profit/(loss)	  (4,697)	     442	      (516)				
					 TOTAL	6,660.10	

7.	On 3 July 2007, an enquiry was opened into the tax return for the year ending 5 April 2006 under section 9A TMA 1970.  During the enquiry, the Appellant explained that the self-employment income arose from his work as a handyman.  The Appellant had no business records to support his self employed income..  He explained that he had provided the relevant records in a box to his accountants and when returned to him his fiancé, at that time, threw the records out.  

8.	There were several communications between the Appellant, his advisers and HMRC regarding the nature and extent of self-employment work undertaken and the deductions claimed. 

9.	On 14 January 2008, in the absence of supporting records  the enquiry officer under section 9A TMA 1970 raised enquiries with regard to returns for year ending April 2002, 2003, 2004, and 2005. 

10.	In the absence of records and further information to support the deduction and the income, notices under section 28A(1) and (2) TMA 1970 were issued on 18 March 2008 closing the enquiry and notifying the Appellant of Revenue Amendments to the self-assessments for the year ending 5 April 2002 through to 2006.  The Revenue Amendment allowed £250 expenditure as deduction against self-employment income return for each year.  On 12 December 2008, HMRC offered, without prejudice, to allow 25% of the expenditure claimed against self-employment income.  Initially the Appellant  appeared to have accepted this offer but there was a misunderstanding.  The agent believed that 75% of the claimed expenses should be allowed not 75% disallowed.  The offer was therefore not  accepted and has remained open until the present. 

11.	On 8 April 2009, HMRC issued a decision letter in which the Appellant was offered a review of the Revenue Amendments by an independent review officer, in accordance with section 49C TMA 1970.  This offer was accepted.  

12.	On 17 July 2009 the review officer requested the Appellant to submit any further information relating to business, business accounts and business records.  Nothing was received pursuant to this request..

13.	The review letter dated 15 September 2009 concluded that the level of expenses claimed was excessive given the small amount of self-employed income and  the expenses claimed probably related to items  used for a mixture of purposes relating to employment, self-employment and  personal use.  While some adjustments were allowed with regard to printing and legal costs and 5% deduction was given for capital allowances on a motor vehicle, the expenses claimed were largely disallowed.

Relevant legislation

14.	Taxes Management Act 1970 (TMA 1970)
S. 9A – provision for HMRC to open an enquiry into the tax return for an        individual.

S .12B – requirement for records to be kept for the purposes of Returns.

S .19A – information power to request formal provision of documents and information from the customer

S .28A(1) & (2)  – provision for HMRC to close an enquiry with amendment, or not to the Return.

S .30 – provision for individual to appeal against notices and assessments to produce documents.  Includes the Tribunal’s direction as to when to set aside or confirm the notice.

S .31A – sets out the time limit to make an appeal and how an appeal must be made.

S .49A-G – right of appeal, request of review and appeal against review decision.

S .50 – puts the onus on the appellant to demonstrate that an assessment is excessive.

Income and Corporation Taxes Act 1988 (ICTA 1988)

S .74 – defines what deductions are not allowable in computing the figure of assessable profits.

S .380 – allows for the set-off of trade losses against general income.

S .384 – sets out restrictions to the right of set-off under S380.

S .384A – restricts set-off of loss in respect of Capital Allowances.

S .385 – provides the carry-forward of unrelieved loss against subsequent profits.

Social Security Contributions and Benefits Act 1992 (SSCBA 1992)

S .16 – applies the Income Tax Acts to Class 4 NIC contributions.

Capital Allowances Act 2001

S .5 – sets out when a capital expenditure is incurred for Capital Allowances purposes.
S .11 – sets out the general conditions as to availability of plant and machinery allowances.

	The Tribunal was provided with a documents bundle, a correspondence bundle and a legislation bundle together with supporting correspondence from the Respondents.

The facts

15.	The facts are not disputed ..

Appellant’s submissions

16.	On 10 April 2008 the Appellant stated (the wording is taken from correspondence):

(1)	HMRC had not taken into account information submitted and made amendments to assessments.
(2)	In the appeal dated 10 October 2009 against the Review conclusion , the appeal was submitted late due to a family bereavement
(3)	In the appeal dated 10 October 2009 against the Review conclusion the grounds of appeal were given as (a) HMRC did not take into account what a client discussed at HMRC’s offices in person (the Tribunal was provided with notes of two meetings one held on 22 November 2007 and the second held on 13 December 2007) (b) HMRC Review Service asks some questions which the client and        accountant provided answers for during the enquiry (c) HMRC Review Service and Enquiry Team have some goals i.e. collect taxes/NIC at all costs(d)The Tribunal service has ultimate decision to make on the matter.
(5)	In the appeal dated 10 October 2009 the agent stated (a) the client and accountant had suggested to reduce the expenses claimed in each year by 25% (b) HMRC rejected this proposal after proposing no profit nor loss solution.  This would have resulted in repayment to HMRC (c) client and accountant will agree a 25% claimed to be repaid to HMRC (d) HMRC is holding on to 2007 and 2008 tax refund for the client.

17.	At the hearing the Appellant made the following points:

1.	The accountant’s computer was infected by a virus which caused a loss of records.
2.	The accountant confirmed that he had reviewed the relevant records and provided some rough notes (two pages) to support the figures presented to HMRC.
3.	The Appellant said that although the car was owned by his brother he was listed as the second driver since he had only a provisional licence and the HMRC’s statement that he did not own the car was not entirely true.
4.	The Appellant said that he was not at college in 2005, 2006 and therefore did not pay fees (£4,400) and therefore the HMRC’s figures showing a deficit in earnings for that year was not accurate.
5.	He said his earnings fluctuated in the period 2001 to 2005 when working at O’Neill since he was not employed full-time but in an agency capacity and work was provided only when called upon to do so.
6.	Dr Mafunga, a business consultant, stated that the Appellant was honest and acted reasonably in the circumstances.

The Respondents’ submissions

18.	The Respondents submit that the Revenue Amendments issued on 18 March 2008 for the years ending April 2002 to April 2006 inclusive are reasonable in view of the lack of supporting records.

19.	The Review Officer upheld the figures for deductions assessed with the exception of those for printing, legal fees and capital allowances (vehicle) .which were allowed

20.	The low amount of self-employed income on the five unsolicited returns were accompanied by relatively high amounts of deductions claimed, creating losses in each year.  Relief for the losses were claimed against PAYE income created refunds for each of those years.

21.	The Appellant was only unable to provide documentary evidence to support his claims and was only to submit workings from the accountants (link papers) of work undertaken by the accountant.  In the circumstances, relief or losses should be restricted under section 384(1) ICTA 1988.

22.	The expenditure claimed was not wholly and exclusively for the purposes of the trade and therefore the deduction should not be allowed in accordance with 74(1)(a) ICTA 1988.  It should be noted that for the purposes of deductions against employment  the expenditure would have to be wholly, exclusively and materially for the purposes of employment.  

23.	The Respondents have not imposed penalties in respect of a failure to disclose a taxable source of income, failure to retain adequate business records and the negligent submission of income tax returns.

24.	The Respondents say that most of the deductions related to the Appellant’s employment rather than self-employment activity.

25.	The vehicle against which capital allowances were claimed was not owned by the Appellant but by his brother and this did not satisfy the conditions under the Capital Allowances Act 2002.
26.	The Respondents are concerned that the personal and business expenditure appears to exceed the Appellant’s known income and  raises questions on his ability to fund declared business expenses.

27.	Given that the Appellant was in full-time employment ,the time available for undertaking work as a handyman, on a self-employed basis, was limited.

28.	HMRC have acted reasonably in arriving at justified figures for inclusion in the calculations and assessment of the Appellant’s liability to income tax for the years ended 5 April 2002 to 5 April 2006 inclusive.

29.	The Appellant has not satisfied the onus of proof to show that the assessments were excessive.

General conclusions

30.	This appeal would be dismissed for the following reasons.

1.	The Appellant has failed to discharge the onus of proof pursuant to section 50(6) TMA 1970 to show that the self-assessment as amended is excessive.  The standard of proof required is on a balance of probabilities.

2.	No proper records or receipt in support of the figures of self-employed income and expenditure submitted with the tax returns were provided.  Indeed the total amount of paperwork in this regard provided at the Tribunal was one single page.  The Respondents made  clear  in their letter of 17 July 2009 as to what details they required.  In the absence of relevant records to support the figures the Tribunal is unable to accept the Appellant’s submissions.
3.	The Appellant has also been unable to provide, through their advisers, records which the accountant would have compiled in the preparation of the returns.  It is normal for an accountant to keep appropriate records and calculations and it is unfortunate that these were not available to the Tribunal.  The Tribunal is therefore unable to satisfy themselves as to the standards of proof required in this matter.

31.	The Tribunal has difficulty accepting that the self-employed work of the Appellant was on a commercial basis given the profit which were realised over a five year period.  The amount of expenditure incurred with regard to this employment appears excessive and not proportionate.  It seems likely that the expenditure was incurred with regard to both self-employed, employed and probably for the personal use of the Appellant.  The Tribunal is mindful of the legal obligation that such expenditure must be “wholly and exclusively” for the purposes of the trade pursuant to section 74(1)(a) ICTA 1988.  In the circumstances, there should be apportionment of that income and the Tribunal say this was done in allowing printing and legal costs together with an allocation of 5% capital allowances on a vehicle.  The income from self-employed work for the period 2001/2-2005/6 range from between £692 to £1,500 per annum. This would account for a small proportion of the overall work done by the Appellant when compared to work undertaken under PAYE (the Respondents calculate this to be roughly 5% of time spent working in 2005/6) as such, to allocate the entire     motor  costs and  capital allowances together with 90% of mobile phone cost and 100% of capital allowances on tools to self-employed income is not an acceptable way to proceed.  Further, in 2005/6 expenses included a claim for £335 of protective clothing (including helmets and gloves) and tool replacements/repairs, plus capital allowances based on a figure of tools purchased of £5,540.  This is not consistent with the nature of the work performed for self-employment.

32.	With regard to the vehicle purchase, it is accepted by the Tribunal that the vehicle was in the Appellant’s brother’s name for given reasons.  However, the vehicle was stated to be purchased for £9,500 but only £4,500 had been actually paid.  It was also seemed that the vehicle would have been used substantially for the purposes of employment.  Work as a self-employed person was undertaken mainly for friends and family.  The 80% self-employed business use of the vehicle capital allowances based on income of roughly 5% of overall income would seem disproportionate.

33.	With regard to expenditure on tools, this appears to be excessive.  The figures show that £5,540 was spent in 2005/6, £7,000 in 2002/3 and a further £2,000 in 2003/4.  The Tribunal accepts the statement of the Inspector of Taxes (Mrs Ace) in her letter of 8 April 2009 that in her opinion the tools claimed were not wholly and exclusively for the purposes of the trade.

34.	The Tribunal also feels that the Appellant may not have had sufficient funds to meet the expenses shown on his return.  The Tribunal cannot find as a matter of fact this is the case since  some of the figures provided  by the Appellant were estimates.

35.	The Tribunal believes that the Respondents were entirely reasonable in their assessments.  The allowance of 25%, an offer which is still open, for deductions of expenditure appears to be reasonable.  The allowance of printing cost and legal fees together with a 5% deduction for capital allowances on vehicle is also reasonable and proportionate  in the circumstances.

36.	The Tribunal would like to commend the Appellant for taking the time to get his tax returns in orderand employing an accountant to prepare the figures and returns. The Tribunal believes  the Appellant made all effort to truthfully answers questions posed at the hearing.  However, it is important that appropriate documentation be provided and retained in dealing with one’s tax affairs and in the circumstances this was not done and  the appeal would therefore have to be dismissed.The absence of those records meant that the onus of proof was not discharged.

37.	The Tribunal therefore agrees with the figures provided in the review letter of 15 September 2009.

38.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

DR K KHAN
TRIBUNAL JUDGE

                                               RELEASE DATE: 16 November 2010